Yahoo! buys into Chinese e-commerce firm

Page Tools

Yahoo! is paying $US1 billion ($A1.29 billion) in cash for
a 40 per cent stake in China's biggest online commerce firm,
Alibaba.com, strengthening the ties that international companies
are forging in the world's second-largest internet market.

Yahoo! said it would merge its China subsidiaries into Alibaba
as part of Thursday's deal, the biggest in a flurry of investments
by foreign internet firms eager for access to China's soaring
number of web users, now pegged at 100 million.

Alibaba runs a website that matches foreign buyers with Chinese
wholesale suppliers, plus the popular consumer auction site
Taobao.com, which competes with the Chinese subsidiary run by eBay,
the world's top online auction company.

Rosensweig said the alliance created an entity with assets to
compete across the full range of internet businesses - online
commerce, email and search engines. He expects China to become the
world's biggest internet market within five years.

The deal extends Yahoo!'s strategy of breaking into Asian
markets by connecting with strong local partners. Yahoo! and its
Asian partners were now major forces in online auctions in China,
Japan, Taiwan and Hong Kong, said Porter Erisman, Alibaba's
vice-president for international relations.

"This is really probably the knockout blow for eBay in China,"
he said. "This is going to make it hard for eBay to win in
Asia."

eBay, which bought the Chinese auction portal Eachnet for $US180
million in 2003, rejected suggestions that the Yahoo!-Alibaba
tie-up was a threat. eBay's share of China's auction market is 65
per cent, according to Shanghai iResearch. TaoBao had 29 per cent
in 2004.

"It's business as usual for us," said eBay spokesman Hani Durzy
in San Jose, California.

That sounded like careful posturing to Hoefer and Arnett analyst
Martin Pyykkonen. He noted that eBay chief executive Meg Whitman
had predicted China would become the company's biggest market in
five years, so the Yahoo!-Alibaba alliance signified "more than
just a casual threat," he said.

China is expected to be a significant profit centre for eBay
this year or next, but eBay needed to start capitalising on its
investments in the country in 2007 and 2008 to propel earnings
growth, he said. eBay was expected to invest about $US100 million
in China this year, Pyykkonen estimated.

The new Yahoo!-Alibaba combination will include 3721.com, a
Chinese-language search engine which Yahoo! acquired last year for
$US120 million.

This will put it in competition with China's most popular search
engine, Baidu.com, whose initial stock offering in the US last week
set off a buying frenzy. Its share price soared more than 350 per
cent on its first day of trading before declining this week.

And the second-most popular Chinese search site is operated by a
familiar rival, Google which ramped up its China operations this
week by authorising three Chinese companies as resellers of
advertisements for its China site. Google also owns 2.6 per cent of
Baidu.

The Chinese government says the country has 103 million people
online, second only to the US. But online commerce is still small,
held back by low consumer spending in a country where urban incomes
average just $US1000 a year.

Consumer-to-consumer online auctions in China totalled about
$US500 million last year, while business-to-consumer sales were
about $US1 billion, according to Joe Tsai, Alibaba's chief
financial officer. He said only about 4 million people in China had
used online commerce.

But Tsai said online sales were expected to grow 80 per cent
annually over the next three years.

With its 40 per cent stake valued at $US1 billion, Yahoo!
clearly expects huge growth from Alibaba, which had revenue of
$US68 million last year. Advertisers and companies pay $US5000 to
$US10,000 per year for membership in its commercial online auction
service. It does not charge fees for individual auction listings as
eBay does.

Yahoo! said its investment would make it the biggest shareholder
in Alibaba, which has 2300 employees and is based in the eastern
Chinese city of Hangzhou, southwest of Shanghai.

Yahoo will have 35 per cent voting rights. The new entity will
have a four-member board led by Ma as chairman, with a second seat
held by Alibaba and the others held by Yahoo! co-founder Jerry Yang
and a representative of Softbank, the Japanese firm that is a big
Yahoo! shareholder.

Pykkonnen called that a departure for Yahoo and chief executive
Terry Semel, as the company usually took control of a partner's
operations when it spent this kind of money. The arrangement could
lead to some friction, he predicted.

"Ma has a reputation for being a bit of a cowboy," Pykkonnen
said. "Terry Semel won't be able to rein him in as easily."

Alfred Tolle, head of internet rival Lycos, which recently
opened an office in Shanghai and launched a social networking site
in China, said he believed Yahoo! overpaid for its stake.

Tolle said he wasn't interested in making an acquisition in the
country, and added that the recent fascination with Chinese
internet companies reminded him of the dot-com boom in the United
States a few years ago.

"It's getting a little overheated in China," he said, "a bit
like 1999 or 2000."